Delta Air Lines made news this spring by buying an oil refinery to give it more control of its fuel supply.
In a June 6 interview on National Public Radio
’s “All Things Considered,” Chief Executive Officer Richard Anderson said more companies will follow Delta’s lead and move upstream in the fuel supply chain as a way to insulate themselves from commodity market speculation.
Could the Atlanta-based carrier be distracted by running a non-core business?
“What we have done is set it up as a separate subsidiary with a separate board, and we’ve hired expertise and great senior management from the refining industry so we don’t let our eye off the ball running a great airline at Delta,” he said.
Delta subsidiary Monroe Energy LLC is buying a Phillips 66 refinery south of Philadelphia for $150 million. The acquisition includes pipelines and transportation assets that will enable delivery of jet fuel to Delta operations throughout the Northeast, including its hubs at LaGuardia and John F. Kennedy airports in New York.
Monroe will spend $100 million to convert the existing infrastructure to maximize jet fuel production. It also received $30 million in assistance from Pennsylvania.
The Trainer facility can process 185,000 barrels of crude oil per day.
Production at the facility plus exchanges of gasoline, diesel and other refined products from the refinery for jet fuel from BP and Phillips 66 will provide 80 percent of Delta’s jet fuel needs in the United States. As part of the transaction, BP will supply crude to be refined at the facility. The two oil companies will also help distribute the jet fuel.
“Acquiring the Trainer refinery is an innovative approach to managing our largest expense,” Anderson said in an April 30 statement. “This modest investment, the equivalent of the list price of a new widebody aircraft, will allow Delta to reduce its fuel expense by $300 million annually and ensure jet fuel availability in the Northeast.”
Delta said it expects to begin jet fuel production during the third quarter and changes to the plant infrastructure to increase jet fuel production will be complete by the end of the quarter, resulting in fuel savings this year of more than $100 million.
|“Acquiring the Trainer
facility is an innovative
approach to managing our largest expense.”
— Richard Anderson, CEO, Delta
The carrier had net income of $124 million in the first quarter, compared to a loss of $318 million during the same three-month period a year ago. Special items, such as $151 million gain for valuing future fuel hedges at current market prices and $39 million for exchanging slots at Washington National and LaGuardia airports, helped erase what otherwise would have been a $39 million loss.
During the quarter, Delta’s fuel expense increased $250 million as a 14 percent increase in fuel price was offset by $45 million of fuel hedge gains and reduced consumption. Delta will probably lose money on fuel hedges this quarter as oil prices head south.
Cargo revenue decreased 2 percent, or $6 million, with lower cargo yields partially offset by higher volumes.
Anderson reiterated his call for a national airline policy. The United States needs to determine whether the airline industry is a strategic asset that deserves policy support and infrastructure investment, as competitors such as China have done, he said on the NPR
The U.S. airline industry does not seek government funding or regulation, only continuation of rules changes to help the industry deregulate further, he said.
Anderson defended Delta’s use of fees and higher ticket prices to raise revenue. The airline pulled in more revenue from fees last year, $814 million, than any U.S. rival. The cost of jet fuel has soared in recent years and must be built into the ticket price, he said. Fees for food, checked baggage, wireless Internet and other services allow the customer choice so those who want basic transportation and those who want more amenities have options, as they do for cell phone, cable and other services, he said.
“The systems that we have in place and the cost of transporting bags is in the hundreds of millions of dollars. It is not a free add-on service. The fuel to carry the bag, the investment we have in infrastructure and the thousands of employees that we hire to run our bag systems are a significant cost of our business,” the head of the largest U.S. airline said.
On June 4, Delta invested $65 million in Mexican carrier Aeroméxico. The stock purchase gives Delta a seat on the Mexican carrier’s board. It is the first time a foreign carrier has taken a stake in a Mexican airline. The move strengthens Delta’s footprint in Mexico and its code-share alliance with Aeroméxico throughout the United States and Latin America. The companies are also partnering on a new maintenance and repair facility to open in Mexico next year.
Delta recently agreed to lease 88 Boeing 717 aircraft from Southwest Airlines that currently belong to Air Tran, the subsidiary Southwest purchased last year. Southwest runs a fleet of Boeing 737s and is religious about sticking to a single aircraft type to reduce maintenance and training costs.
Delta must get approval from its pilots union to operate the aircraft, which will replace old 50-seat regional jets and some older DC-9 aircraft still in service. Delta’s tentative agreement with union leaders also allows it to acquire up to 70 76-seat regional jets.
Delta’s maintenance division in April signed an exclusive agreement with Atlas Air, Inc., to provide maintenance and support services for three of Atlas Air’s Boeing 767-300 Extended Range aircraft. Atlas Air is a major provider of outsourced freighter transportation and other aviation operation services.
As of February, Atlas had two 767-300 passenger aircraft in charter service.